New U.S. offshore drilling would undermine climate targets, create ‘carbon lock-in’ and stranded asset risks

Offshore drilling in the Atlantic and Arctic Oceans would conflict with efforts to keep global warming under 2°C that the U.S. and world leaders agreed to in Paris last year, new analysis by SEI shows. The study, prepared by Seattle-based researchers at SEI in cooperation with the Carbon Tracker Initiative, also finds that the U.S. already has “more than enough domestic oil from other sources” to meet all U.S. oil production needs consistent with a 2°C climate pathway, without expanding federal offshore oil production.

President Obama is on the brink of making final decisions about offshore drilling and the use of federal lands and their role in addressing climate change.

SEI’s analysis finds that, since new offshore oil is not needed, the U.S. could stop issuing new leases for offshore oil development in federal waters, “as a contribution towards aligning national energy development with a 2°C pathway”. Such an action would also “send a strong signal to other nations that are similarly committed to the Paris Agreement but still exploring for offshore oil”, the authors write.

The study also cautions about two related risks in allowing further U.S. offshore oil development: “carbon lock-in”, and “stranded assets”.

Carbon lock-in arises when carbon-intensive investments become difficult to walk away from in the long term – for economic, institutional and/or political reasons. Because offshore oil has very high upfront costs, but relatively low operating costs once platforms are in place, investments in this infrastructure are particularly susceptible to carbon lock-in, the authors warn. “Since these investments resist being shut down, they continue to produce CO₂ (or carbon-rich fuels that lead to CO₂), making it more difficult to reach carbon reduction goals.”

At the same time, if global demand for oil declines, as would be expected on a 2°C pathway, the authors warn, offshore oil investments could easily become “stranded” – meaning they fail to achieve the expected returns, potentially creating economic losses for investors and local communities.

“Offshore oil drilling would make it more difficult to meet U.S. and global climate targets,” says Michael Lazarus, a senior scientist at SEI and U.S. Center director. “Continuing to issue new leases for offshore oil risks stranding assets and communities. Were the concept of a ‘climate test’ to be applied to offshore oil, our findings suggest it would not pass, and that the world’s (and U.S.) limited carbon budget would be better spent elsewhere.”

“This new report aligns perfectly with what most Americans think: Obama Administration should use its power to permanently ban offshore drilling in the Atlantic and Arctic oceans,” says Franz Matzner, director of the Beyond Oil Initiative at the Natural Resources Defense Council. “We don’t need the oil. We don’t need the harm to coastal communities and businesses. We can’t afford the damage to the climate. Unless you are an oil company focused on short-term profits, offshore drilling is all downside and no upside.”

In summary, the key findings of the SEI analysis are:

• U.S. oil production would fall steadily should the world pursue a cost-efficient 2°C pathway, by at least 40-50% below current levels by 2040.

• New U.S. offshore oil is neither needed nor consistent with a 2°C pathway, since offshore projects are costly and highly capital-intensive, likely requiring oil prices of $140 per barrel or more to justify investment. In a 2°C world, oil demand would be expected to fall, and prices would likely stay low as well. Furthermore, meeting a 2°C limit means limiting CO₂ to a cumulative carbon budget. Any CO₂ associated with new offshore oil projects would thus need to be made up elsewhere by projects not being developed. Economic efficiency would suggest that, given the higher expense of offshore oil, it should be the last priority for new development.

• The leasing and development of new U.S. offshore oil implicitly assumes that the world is on a pathway for at least 4°C of warming – a level that the Intergovernmental Panel on Climate Change finds would bring substantial new risks to ecosystems, water supply, food security and human health.

• Investment in new, capital-intensive offshore oil expands supply and creates carbon lock-in that makes it ever harder to limit warming, owing to the resilience of offshore oil supply to subsequent drops in oil demand and prices and the strengthening of the political, institutional and technical structures that sustain it.

“It’s clear that we need to stop drilling in the Arctic and Atlantic for good,” said Dan Lashof, of NextGen Climate America, which was also involved in the project. “President Obama took an important first step by taking Arctic drilling off the table for the next five years, but it can still be reversed by a Trump administration bent on serving corporate polluters’ interests at the expense of the American people. That’s why it’s critical that President Obama permanently protect both the Arctic and Atlantic from dangerous offshore drilling.”

Read the SEI briefing paper »

Learn more about the SEI Initiative on Fossil Fuels and Climate Change »